Thursday, February 13, 2014

Profits are rising. Paycheck are flat. The Founding Fathers' solution:

Why Thomas Jefferson Favored Profit Sharing

President Obama's State of the Union speech last
week focused on America's severe and growing inequality, but he stopped short
of repeating the Founding Fathers' many warnings that this condition could doom
American democracy.

The founders, despite decades of rancorous
disagreements about almost every other aspect of their grand experiment, agreed
that America would survive and thrive only if there was widespread ownership of
land and businesses.

George Washington, nine months before his
inauguration as the first president, predicted that America "will be the
most favorable country of any kind in the world for persons of industry and
frugality, possessed of moderate capital, to inhabit." And, he continued,
"it will not be less advantageous to the happiness of the lowest class of
people, because of the equal distribution of property."

The second president, John Adams, feared
"monopolies of land" would destroy the nation and that a business
aristocracy born of inequality would manipulate voters, creating "a system
of subordination to all... The capricious will of one or a very few"
dominating the rest. Unless constrained, Adams wrote, "the rich and the
proud" would wield economic and political power that "will destroy
all the equality and liberty, with the consent and acclamations of the people
themselves."

James Madison, the Constitution's main author,
described inequality as an evil, saying government should prevent "an
immoderate, and especially unmerited, accumulation of riches." He favored
"the silent operation of laws which, without violating the rights of
property, reduce extreme wealth towards a state of mediocrity, and raise
extreme indigents towards a state of comfort."

Alexander Hamilton, who championed manufacturing
and banking as the first Treasury secretary, also argued for widespread
ownership of assets, warning in 1782 that, "whenever a discretionary power
is lodged in any set of men over the property of their neighbors, they will
abuse it."

Late in life, Adams, pessimistic about whether
the republic would endure, wrote that the goal of the democratic government was
not to help the wealthy and powerful but to achieve "the greatest
happiness for the greatest number."

Professor Joseph R. Blasi and Douglas L. Kruse of
Rutgers and Richard B. Freeman of Harvard gathered many of the founders'
writings on this topic for their new book, The Citizen's Share: Putting Ownership Back into Democracy.
Copies are currently circulating among congressional staffers in both parties
as politicians brace themselves to face what polls show is a rapidly rising
concern among voters over economic gains concentrating at the top.

Since 1993, almost a quarter of all income growth
in the U.S. has gone to the top 1 percent of the 1 percent, about 16,000
households. At the same time, the bottom 90 percent, more than 280 million
people, reported less total real income in 2012 than in 1993.

Among countries with modern economies and solid
democratic traditions, America has by far the worst child poverty. Its
distribution of income puts America far from European allies and Canada, but in
the same zone as Brazil, Mexico, Russia and Venezuela.

The authors' most significant discovery may be
that one of the first laws enacted by Congress, a 1792 subsidy to revive a cod
fishing industry ravaged by the British Navy, directed most of the money not to
the wealthy ship owners, but to a class of fisherman known as "sharesmen."
They earned a portion of the profits, under contracts negotiated in advance,
somewhat like modern unions bargaining with management.

Blasi learned of this during a brief 2006 stay at
an old sea captain's cottage in Boothbay Harbor, Maine. "No electricity,
no TV, but I found this old book that told this story, which I did not
believe," says Blasi, who has studied worker ownership of businesses for
four decades.

Years of digging through 18th century records
fleshed out the story, showing the founders' sustained interest in promoting
yeoman farmers who owned their land. Research commissioned by Thomas Jefferson
found that, when fishermen bargained for their pay in advance and shared in the
profits, the operations were highly efficient. (My research assistants at
Syracuse University College of Law have for years dug into colonial era and
late 18th century American business records, and they have made similar
findings.)

Washington and Jefferson recommended giving sharesmen five
eighths of the subsidy, with the rest to ship owners. Owners who paid a fixed
wage got nothing. It was a government carrot promoting both bargaining power
for workers and more profitable enterprises.

Blasi suggests that Congress embrace that 1792
model. For example, he says Congress could allow accelerated depreciation -
quickly writing off the cost of new buildings and equipment for tax purposes -
only at companies that pay workers in part with a share or profits or shares of
stock. Companies that declined would still get the full write-off, but it would
take longer, costing them more taxes in early years.

Madison once extrapolated the U.S. population
into the early 1900s and concluded that not everyone could farm. But he wrote
that since no limit existed on businesses, government could encourage ownership
shares to counter what he wrote were the "evils" of concentrated wealth.

Blasi and his co-authors show that in the late 19th
century, paying workers a share of profits helped build the fortunes of many of
the most successful businessmen. John D. Rockefeller of Standard Oil, George
Eastman of Eastman Kodak, William Cooper Procter of Procter & Gamble and
grain merchant Charles A. Pillsbury all used profit-sharing to attract the best
workers, discourage unions, reduce turnover and give employees a greater
incentive to make their businesses prosper. "They did it, for sure, out of
self-interest," Blasi says, "but it was an enlightened self-interest
that benefitted society as a whole."Profit-sharing plans are rare these days and
often meager. Except for some high-tech startups, few workers get stock as part
of their compensation. Since the early 1990s, American companies have given almost
30 percent of stock options to their top five executives. "Nearly all of
the rest of the options go to the top 2 percent or so of company employees,"
Blasi says.

There are nearly 140 million business employees
in America, but just 19 million own stock in their companies, and most of that
is as a match in a 401(k) plan. Management typically restricts the rights to
these shares: Managers vote the shares and workers cannot sell before age 55 or
leaving the company.

Employee Stock Ownership Plans (ESOPs), created
in 1956 in what is now Silicon Valley, are out of fashion, even though
companies with ESOPs tend to be significantly more profitable. San Francisco
financier Louis O. Kelso, who taught that every worker should be a capitalist,
invented the ESOP. Critics called him a Marxist and worse. Kelso's lawyer,
Robert Ashford, says that the idea of owning shares and sharing in profits has
been lost on most Americans, although millions of them are grumbling that the
economy is growing, but their paychecks are not.

Ashford, a professor at Syracuse's College of
Law, teaches that if more Americans could buy stocks with the dividends paid by
companies, the whole country would benefit. The wider distribution of capital,
he says, would give most Americans a direct stake in the success of business.

And that, say Ashford and Blasi, is exactly the
future envisioned by the framers more than two centuries ago - an America in
which every worker is a capitalist.